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The use of incentives to encourage charitable donations is commonplace. The governments of most developed countries (including the UK), as well as many large employers, offer match rates, or rebates to encourage donations. The principle behind such match rates is simple. With Gift-Aid, the UK’s main form of tax effective giving, a donation of £1 from net-of-tax income by a taxpayer attracts basic rate tax relief, which goes straight to the charity – hence, the charity receives £1.25 for every £1 donated.

The effect of this is to reduce the price of donating a given amount – if I am a basic rate taxpayer, and think “I want the British Heart Foundation to receive £100”, making that happen will only cost me £80 from my net of tax spending.

There is much discussion, both in the academic economics literature and in the public sphere, about the effectiveness of such matches, particularly in the aftermath of last year’s proposed £50,000 cap on charitable tax relief – although most studies find that people’s donations are relatively unresponsive to changes in the match rate (they are price inelastic), CMPO research has shown that high value donors may be more responsive to changes in their match (or rebate) than are smaller donors.

This mixed evidence on the effectiveness of matches at increasing out-of-pocket donations suggests that alternatives to the standard match may be more effective. Options for non-standard matches are summarized in our new working paper, which draws on the behavioural economics and psychology literatures to several such possibilities, including, non-linear matches, where the more an individual donates, the higher the match rate; social and team matches, in which the match rate received by one donor depends on the donations of others, giving them an incentive to ‘crowd in’ their friends and colleagues; competitive matches , when only the most successful fundraisers receive a match); and lottery matches, where each donation increases the chance of a donor’s chosen charity receiving a large windfall match.

Although these suggestions are sound in principle, and supported by both theory and empirical evidence, none has been experimentally tested in a real world setting. We would encourage anybody interested in testing one or more of these novels matches to contact us.

The 2013 London marathon is in less than a week’s time. The hard slog of training behind them, most runners will be easing up, resting their legs before the real thing. Over the last few months, many will have sought training tips to improve their running, but what about the thousands of runners who are using the London marathon as a way of raining money for charity? What are some of the top tips for how they can achieve a fundraising personal best?

The good news for marathon runners is that they have chosen a good event. Compared to fundraisers doing other events – cycling, parachuting, birthdays and other running events – London marathon fundraisers tend to have more donors (29 is the typical number) and raise more money overall (between £800 and £900 is typical).

Most marathon pages have a fundraising target. This seems to work. Compared to having no target, pages which specify a target amount get more donations and higher average donations. Donors clearly respond to the target – when the total amount raised gets close to the fundraiser’s goal, donors increase their donations to hit the target, but they give less once the target has been reached. With this in mind, raising the target could be one way to keep donations high.

Donors are also responsive to how much others have given. Arriving at a fundraising page, each donor can see how much other people have given and this information affects how much they give. A generous donation to a page – particularly made early on – can have a positive effect on later amounts given. Our results suggest that a one-off donation of £100 leads to around a £10 increase in the amounts given subsequently. Some of the effect comes through the fact that this kind of large donation triggers other people to match it; but there is also a wider, positive effect. Small donations, on the other hand, result in subsequent donors giving less. So, fundraisers have an additional incentive to encourage their friends, family and colleagues to be generous because of the knock-on effect that donations have on how much other people give.

Most people raising money by running in the London marathon will be relying on donations from their friends, family and colleagues. One question that Kimberley Scharf and I are looking at is how important the size of the person’s social group is – and whether you can be a successful fundraiser even if you have a relatively small social network. We capture the size of a fundraiser’s social network by the number of their Facebook friends. This may not be a perfect measure of the potential donor pool but many fundraisers do post to their Facebook pages. We find – perhaps surprisingly – that larger social networks do not translate into higher total amounts raised. Although fundraisers with more friends tend to get more donations, each donor in a large social network typically gives less, meaning that the total amount raised is roughly the same for those with a thousand-plus friends as it is for those with less than a hundred. This is true controlling for age and income and is also true for pages without a target.

There are a number of explanations for why this might be the case. One possibility is that, in a larger group of donors, each person’s donation matters less to the fundraiser and so the donors give less. It may also be the case that there are weaker relationships between the fundraiser and their friends in larger social networks. By digging further into the fundraising data, we hope to get a better understanding of the relationships between fundraisers and donors and provide further insights into what determines fundraising success.

On Thursday, New Philanthropy Capital published a new report, Money for Good UK, about why people give and what might be done to encourage them to give more. The very next day, the 25th Comic Relief raised a record-breaking £75 million for charity and in doing so, served to illustrate a number of the key themes from the report. One of the messages from the report is that around half of donors feel no underlying obligation (moral or otherwise) to give money to charity. 47 per cent of those asked (mainly people who had given money to charity in the previous year) agreed that people should donate money to charity if they have the means. But nearly the same number (44 per cent) agreed that people should not feel obliged to donate money to charity. Comic Relief is a testament to the efforts of literally thousands of people to persuade other people to give to good causes.

So, what does persuade people to give? The report found that the personal touch is important – whether personalized communications from charities that donors have relationships with or an approach from friends, family and colleagues – and perhaps the odd famous celebrity.

People also say they care about impact. When asked about what factors they pay attention to when they give to charity, the most important is how the organization will use their donation (with 63 per cent of donors pay close or extremely close attention) and evidence that the organization is having an impact (with 58 per cent paying close or extremely close attention. This mirrors similar findings from a recent survey done on Justgiving donors. It is certainly something that Comic Relief understands – interspersing the comedy with clips showing where the money is going and how it is going to be spent.

It is a commonly held view that giving isn’t a rational decision. Providing evidence that donors care about impact and evidence of impact is therefore important. And it helps charities and fundraisers think about what kind of messages they need to deliver. But, it needs probing a little further. What does impact mean to donors and what kind of evidence do they want? On one level, it is clear that donors don’t want their money to be wasted, but do they really want to be presented with detailed accounts or impact studies? The report is careful not to push this too far – they emphasize that few donors do detailed research before giving to charity. Indeed, one possible explanation for the importance of personal recommendations is that friends and family are effectively vouching for the quality of the charity and acting as a substitute for the donor’s own research.

Following the report, NPC have emphasized that charities need to do more to demonstrate impact. But, another important next step is to find out more about what kind of information donors want – and how they respond to messages about charity impact and different types of evidence. There has been some limited work in this area showing that donors respond better to simple messages about personal cases rather than detailed statistics. These findings come from simple field experiments in which donors are randomly given different information to test the effect of alternative messages. More worryingly, the experiments show that donations actually appear to decline if donors are given, alongside the personal cases of individuals who are going to be helped, statistical data about similar victims caught up in a larger pattern of illness, hunger or neglect. The authors of the research concluded that donors respond to real rather than statistical lives. So while it is important for charities to generate data about their impact, it would also be worth finding out how best to deliver effective messages about charity impact in ways that – like Comic Relief – elicit positive responses from donors.

CAF and NCVO have today published the latest UK Giving report showing a decline in donations to charity. The estimated total amount donated to charity by adults in 2011/12 was £9.3 billion, a decrease of £1.7 billion in cash terms, and a decrease of £2.3 billion in real terms, compared to 2010/11.

Much of this decline is likely to be attributable to the ongoing economic climate. Looking at historical data, we know that donations were fairly resilient in previous recessions in the early 80s and early 90s. But this recent recession has lasted much longer and now appears to be hitting giving hard. In the past, donations have also tended to rise strongly when the economy grows, so let’s hope this bodes better for giving bouncing back in the future.

However, analysis that I recently did for CAFpoints to clear generational patterns in giving that may be more worrying for the prospects for donations. The research highlights a divide between pre- and post-war generations in terms of trends in giving. Among pre-war generations, there was a clear tendency for subsequent generations to be more likely to give at each age than their predecessors, and to be more generous. Among post-war generations, these trends – particularly in the proportion giving – have been going in the other direction. As a consequence of these generational changes, the giving population is ageing. Thirty years ago, around one-third of donations came from the over-60s. Today it is more than half.

A number of commentators have questioned these findings. In the discussion that followed the report’s publication, a number of points were raised about the analysis, all of which were legitimate, but none of which invalidated the research findings.

First – it was argued that we would expect some ageing of the donor population since the general population has been ageing. This is true, but the donor population is ageing faster than the general population. As noted in the original report, the share of giving done by the over-60s has been rising much faster than their share of total spending.

Second – the analysis focused on giving at the household level since many couples make joint decisions about giving. The rise in single-person households mean that the composition of households today is not the same as it was thirty years ago. But the same trends in giving are present if the analysis is done at the individual – not the household – level. The generational divide is not something that can be explained by the rise in single-person households.

Third – much of the media analysis focused on low levels of giving among young households (in their 20s and 30s). This led many to point out – quite rightly – that people in their 20s and 30s today face many new financial pressures that their predecessors did not – from student debt to high house prices. But, the report is clear that the generational divide is one between the pre- and post-way generations, not something that is unique to today’s 20 and 30-somethings. People in their 50s today (the 1960s baby boomers) are less likely to give than today’s older households did when they were at the same age.

A number of factors may explain the generational divide – including changing religiosity, wider trends in civic participation (interestingly, other people have found similar trend when they have looked at voting, for example) and even the growth of the welfare state which for some people reduces the rationale for giving to charity. It is hard to say for sure why the post-war generations are less likely to give than their pre-war predecessors, but important to bear these long-term trends in mind when looking at the latest dip in giving.

The furore over the cap on tax relief on charitable giving refuses to go away. As one back bencher put it the other day – it is hard to see why you would want to pick such a fight for such small estimated financial savings.

And if you do, it would be good to be armed with some good arguments and some hard evidence – the current Government appears to have neither.

A better argument would focus on the effect of tax incentives on donations. If you cut tax incentives, donors are likely to reduce their giving (i.e. the charity sector will lose) but they aren’t likely to stop giving altogether. The critical issue for the Government is whether the loss in donations is more or less than the gain in tax revenue. It is the combination of the two – total donations and total tax revenues – that will determine the overall level of “public services” (in the broad sense) that can be provided.

What matters is the responsiveness of charitable donations to changes in the “price of giving”. The critical level of the price elasticity is one (in absolute value). If the price elasticity is less than one in absolute value then the fall in money from donations will be less than the increase in Exchequer revenue – the charity sector will lose but this will more than offset by an increase in tax revenue out of which to fund public services (or to compensate charities). If the price elasticity is greater than one in absolute value, however, then the fall in donations will be greater than the increase in tax revenue.

What does the evidence say? The Government has said very little on the likely behavioural response. But just over two years ago, we did some research for HMRC and HM Treasury on donor responsiveness to changes in Gift Aid tax relief. This looked at both the rebate relief (how much higher-rate donors can claim back – which is the bit that is going to be capped) and also the basic-rate relief that charities can claim on all taxpayer donations. This second element is a bit like a match – I give £1 to charity out of my net-of-tax income and then the Government matches it with 25 pence worth of basic rate relief. Our main finding for higher-rate taxpayers as a whole was that contributions were significantly more responsive to changes in the match element (elasticity greater than one) than they were to changes in the rebate (elasticity less than one) – this result is shown in the first row of the table below.

In principle, this would provide a plausible rationale for cutting back on rebates. An elasticity less than one in absolute value means that rebates are not a cost-effective way of increasing money going to the sector – it would be more cost-effective for the Government to increase the match element, or to allocate the funding to charities itself through grants.

Yet, as F Scott Fitzgerald once said, “the rich are different to you and me” and in this case, the more people give, the more responsive they are to changes in tax relief – not surprisingly since the stakes are higher. This is clear from the other results in the table below. In the report, we estimated the elasticity separately for donors who had given £10,000 a year or more – and found that they were more responsive than other higher-rate donors, although the rebate elasticity was still below its critical level.

But, we can do further analysis on the data to get closer to the group that is actually going to be affected by the cap. The table reports new results for donors who reported that they gave £25,000 and £50,000. The sample sizes are small for this final group, but the estimated rebate elasticity is -1.19. This is greater than the critical level, implying that the loss in donations following a cut in the rebate would be greater than any increase in tax revenue.

Of course, there are caveats to this finding – donors were responding to hypothetical changes, there are only a few really big donors in the sample, a cap on relief is not the same as a change in the value of the rebate. Yet, it is pretty much the only available evidence on how these donors would respond and it suggests a sizeable response among the group that is going to be hit by the cap – bigger than any increase in tax revenues.

Estimated elasticities – changes to the rebate and match elements of Gift Aid.

The impact on the level of funding, therefore, is potentially negative. There may be a different argument to be made about the allocation of funding – the services funded through private donations will be different to publicly-funded services. In some quarters, this has been characterized as a choice between the NHS and the Royal Opera House, although this is a gross simplification – wealthy donors give to a range of different charities; and charities may be better at delivering public services in many cases. Indeed, one reason why the cap on tax relief is hard for many to swallow is that up until now, this Government has been clearly signaling that it favours private funding and private delivery (“Big Society, not Big Government”). Behind the debate over the tax cap lie some fairly fundamental issues about how – and by whom – public services should be funded and provided.

The Chancellor announced on Tuesday[1] that he was “shocked”, by the extent of tax avoidance occurring, completely legally, through wealthy individuals giving large portions of their income to charity, or claimed through other tax reliefs.

This comes as part of an ongoing row between third sector organisations and the government over the plans announced in the Budget to cap the amount on which tax reliefs can be claimed at £50,000, or 25% of an individual’s income, whichever is greater. The effect of this, estimated by the government as a saving of £890million in 2014-15 if individuals do not change their behaviour, remains, as Sarah Smith said in this blog[2] previously “almost impossible to answer” by a third party, as HMRC do not make available the data used in their analysis – which is itself not broken down by sources of reliefs.

This morning’s declaration by Number 10 that “wealthy people are donating to charities which do not do a great deal of charitable work”[3], is another salvo in this argument.

It does, however, highlight a more serious issue with the way in which charities are regulated in this country. The organisations to which these donations are going must be bona fide charities, registered with the charities commission, in order for these reliefs to be claimed. The Charities Aid Foundation, among the vociferous opponents of the change to the tax relief system, would presumably not oppose the prevention of tax avoidance through these charities.

If, as the government is presumably arguing, these charities exist purely for the purpose of tax avoidance, why are they afforded charitable status at all? Why does the government feel that it is acceptable for people to avoid tax to the tune of 25% of their income through these faux-charities, but no more? Although some have long argued that there are too many charities in the UK[4] (over 180,000)[5], it is understandably hard to make a clear judgement as to which should be disposed of. Nonetheless, the government’s statement this morning implies that they are able to identify a number of them. Given that these charities are the recipients of huge donations, cutting back on avoidance through them by stripping them of their charitable status and making more rigorous the accreditation and auditing process for charities would appear to be more efficient than the imposition of a cap, and would avoid the collateral damage to legitimate philanthropists and the charities they support.

First the granny tax and now the cap on higher-rate reliefs. The £50,000 cap on higher-rate reliefs – announced as a measure to reduce tax avoidance – is proving contentious because it applies to charitable giving (as well as loan relief and loss relief).

Aside from the merits or otherwise of pre-announcing caps (if you are serious about limiting tax avoidance then why give people plenty of time to re-organise their affairs?) another credibility issue is whether charitable donations really constitute a major vehicle for tax avoidance – unless this is closing a potential loophole to limit the damage from closing other loopholes.

The issue that is causing real concern however is how much damage the cap will do to major donations – exactly at a time when other Government departments are looking to philanthropists to make up the shortfall from funding cuts in areas such as arts and education.

This crucial question is almost impossible to answer – at least outside HM Revenue and Customs – because it requires knowing not only how much people donate, but also how much their income is and how much they use the other reliefs. HMRC have estimated a projected total saving of £870 m in 2014 – 15. Since this is nearly twice the current level of all higher-rate reliefs for charitable donations (Gift Aid, payroll giving and gifts of shares and land), the presumption must be that the adjustment will in large part be to the other capped activities. However, it would be helpful to have more detailed estimates that broke down the revenue savings across the different types of relief – and only HMRC is well-placed to make this kind of calculation.

HMRC also provided a lower projected saving (£490 m in 2014 – 15) that takes into account behavioural responses – i.e. the fact that people can respond by smoothing their donations over time. This behavioural adjustment could potentially reduce the total loss of income to the sector. But, not everyone is able to respond in this way.

Analysis of data from the Charities Aid Foundation (CAF) – who provide charity accounts to a number of major donors – reveals a sizeable number of donors who regularly give away amounts that would make them likely to be hit by the cap in a single year. Over a six-year period from 2005/6 to 2010/11, 124 CAF account holders gave away more than £200,000 in any single year. Moreover each of them gave this amount an average of 2.5 times over the six years. However, this understates the consistency of their giving since not all of them were in all six periods. In fact only two – out of the 124 donors – did not give more than £200,000 in each and every period in which they were observed in the data.

Of course we don’t know what these donors’ incomes are and we don’t know what other reliefs they are claiming. But if they give large amounts regularly and can’t smooth their giving, the donations they make in excess of the cap – totaling more than £43 million in 2010-11 (£50 million if the cap applied to donations of £100,000 or more) could be at risk.

Although many of these donors are part of the “million pound donor club” making large, single gifts, much of their giving is less visible consisting of smaller donations spread over a wide range of different charities – more than 1,000 different organisations in 2010-11, including the arts and education as well as medical charities, overseas charities and small, local organsations. The impact of the cap on the sector could be widespread.